Question

On 4/6/2000, Airbnb, the home-sharing company, said it was raising $1 billion from private-equity firms Silver Lake and Sixth Street Partners to bolster its financing. The funding comes at a steep price: $1 billion of debt with an interest rate of more than 10%. While some investors declined to put in new money after Airbnb said it wouldn't replace its CEO and others didn't participate because they didn't think the terms were favorable, Silver Lake and Sixth Street Partners said they had faith in the business and existing leadership team. Airbnb hasn't addressed its plans for a public offering, which had previously been considered the hottest prospective IPO of 2020. Airbnb is now weighing plans to raise as much as $1 billion more in new financing, said the people familiar with the matter.

According to the WSJ article (please see the attached under Week2 reading assignment), please discuss (1) The issues facing Airbnb stemming from Covid-19. (2) Irrespective of Covid-19, what challenges does Airbnb face with respect to its cost structure and business model? (3) Why are the financing terms for the $1 billion it raised so onerous? What other financing options do you believe Airbnb could have explored?

Answer 1

1)

Airbnb's value fell from $31B dollar in 2017 to $18B dollar in 2020 leading up to 42% loss caused by coronavirus.

Airbnb basically connects a host to a guest.

Problems to the hosts
The changed policy by the company provided negligible control to the hosts while deciding the cancellation fee. Since the travel industry totally stopped, hosts started losing money.

Problems to the guests
To avail a full refund, the cancellation was needed to be done between a specified period. Otherwise, the guests weren't eligible for a refund. They were also required to submit various health-related documents which were not possible for many guests owing to the lockdown.

2)
Business model:
Airbnb basically connects a host to a guest. It takes a 3% cut from a host and a 14% cut from the guest.

Airbnb has been famous for its short-term rentals and had no viable competitor in the US and was clearly a market leader.

Airbnb needs to regain the trust of hosts and guests. They have recently announced a $250M fund for helping the struggling hosts. They have also raised $2B in order to have more costs on their balance sheets.

3)

The debt cost is very high due to high perception of risk in the business. This business is low asset, so collateral for debt is low. Airbnb could have considered credit enhancement techniques, maybe internally or externally. For. eg, cash reserve fund, excess spread, tranches, overcollateralisation, surety bonds, letter of credit or bank guarantee.

Airbnb could have explored equity financing too. Also, convertible debt which would have provided the investors an option to convert the debt to equity.